Trickle-down liability in the supply chain

“If you’re contracting out, and the price seems too good to be true, someone’s probably getting ripped off. And if it turns out to be the workers, and it turns out you half knew that, then you are in danger yourself of having been involved in a contravention”

These comments were made by Natalie James of the Fair Work Ombudsman (FWO) last month after the workplace regulator settled its long running prosecution with retail giant Coles, in connection with the unprecedented ‘trolley collectors case’. In an environment where outsourcing is prevalent and often complex, the prosecution of Coles has been a sobering reminder to the business community that lawmakers and regulators are sharpening their view on chain of responsibility.

The FWO brought its action against two trolley collection contractors in 2012, alleging their employees had been grossly underpaid. It also joined Coles as a respondent to the proceedings, on the basis that Coles were knowingly involved in the underpayment contraventions as it had contracted trolley collection duties to a head contractor, who then sub-contracted the work to these companies.

While at first blush, the proposition of roping in Coles appears to defy the ordinary principles of sub-contracting, here’s how the FWO made the argument stick:

Under the Fair Work Act, a person can be found to have contravened a provision of the Act by simply being ‘involved in’ the contravention. In other words, being an accessory to the crime is treated the same as committing the crime itself. There are several ways a party can be ‘involved in’ a contravention, they include:

a: aiding, abetting, counselling or procuring the contravention;

b: inducing the contravention, whether by threats or promises or otherwise;

c: in any way, by act or omission, directly or indirectly, knowingly concerned in or part to the contravention; or

d: conspiring with others to effect the contravention.

The FWO alleged it was likely Coles was aware that the trolley collectors were not being paid in accordance with lawful award rates based on the contracted payments that Coles was making to the head contractor. The legal issue therefore turns on whether ‘knowingly concerned’ requires actual knowledge of the contravention, or whether it has a broader meaning that could include being recklessly indifferent or wilfully blind.

While the stage was set for a landmark legal outcome in the case, which would have significantly impacted the duties of parties at various levels within the supply chain, Coles resolved the prosecution last month by providing the FWO with an enforceable undertaking, which requires Coles to:

reimburse 10 underpaid trolley collectors a total of $220,174.69;

establish a fund in the amount of $500,000 accessible by other trolley collectors that have been underpaid by Coles’ sub-contractors;

conduct annual wage audits of its sub-contractors; and

implement new internal systems and procedures relating to outsourcing.

Coles also established a hotline for further trolley collectors to come forward and make underpayment complaints and it is in the process of bringing the trolley collection function back ‘in-house’.

In the undertaking, Coles was ‘prepared to acknowledge that it has an ethical and moral responsibility to require standards of conduct from all entities and individuals directly involved in the conduct of its enterprise that company with the law and meet Australian community and social expectations’.

Parting comments and issues for thought

Supplier chain of responsibility is the new frontier, not only in respect of corporate social responsibility, but also for accessorial liability. In a regulatory environment where your business can be liable for the unlawful practices adopted by your subcontractors, it is imperative to keep proper control and oversight of all outsourcing. The Coles case is a sage reminder that even big business can be susceptible to the lure of low cost outsourcing and the failure to consider whether it is potentially a party to unlawful practices within the supply chain.

Businesses that outsource or subcontract aspects of their business ought to consider whether they have in place adequate controls and procedures to manage the risks cited in this alert. Some of these measures may include:

implementing a supplier code of conduct that imposes obligations on the supplier to carry out the outsourced work in accordance with all applicable laws and industry standards;

carry out audits / inspections of suppliers to ensure that they are meeting their employee obligations;

The relevance and suitability of the above example measures will depend on the scale of your business and the extent of your outsourcing operations. However, at a minimum, all businesses should ensure they have a supplier code of conduct that is ingrained into their supplier or outsourcing processes.

For further information regarding the issues raised above, or to discuss how these measures can be implemented at your business, please contact:.